Natural Gas Mean Reversion?

Over the weekend I tweeted that I liked Natural Gas on a closing basis above $2.75 and got a few questions asking for an explanation. Here is my reasoning.

As with any financial market prediction, a timeframe needs to be defined. I expect this trade to play out over the next 3-6 months and therefore, by my definition, it is not a long term investment.

A look at a 10 year weekly bar chart of natural gas with nothing more than a simple moving average and a momentum indicator makes it clear why this is just a trade.

Natural Gas Weekly

  1. The 200 week simple moving average is declining.
  2. Momentum continues to confirm new lows in price and recently hit oversold conditions.
  3. Prices undercut the August-September 2012 lows and closed higher to confirmed support.

It doesn’t take any fancy system or strategy to see that structurally, Natural Gas remains in a downtrend. With a downward sloping 200 week sma and a lack of any positive divergence in momentum, it is going to be difficult for prices to sustain rallies.

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The Type of Setup I Look For: INTC

For those of you that follow my posts, you know that my analysis looks at five main things: absolute performance, relative performance, momentum, seasonality and sentiment. At any particular time, many assets will have a few of those things going for them, but I try to locate the assets that have all of those things working for them at once. In the case of INTC, I think conditions are setting up for a great risk/reward trade.

First off, with any stock that’s had a nice run over an extended period of time, I like to look at sentiment and seasonality to make sure that there aren’t any blaringly obvious headwinds to be aware of.

INTC Seasonality

Analyst Coverage (Yahoo Finance)
Strong Buy 6
Buy 14
Hold 19
Underperform 4
Sell 3
Total 46
Bears as % of Total 15.22%
Hold or Lower as % of Total 56.52%

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Oil Update

With oil up roughly 24% off last Thursday’s intra-day low, many are wondering if oil has bottomed for good. Although I think that the action in crude has been constructive over the past few weeks, it’s important to put things into context and realize that a 24% move from intraday low to high, in four days, is clearly not sustainable. I’m going to use this post to look at what the factors I look at are saying about oil and explain what I think bulls need to see for this to really be the bottom.

First off, I’d like to provide some context to the underlying price action by looking at measures of sentiment and seasonality.

1. Crude is entering the best 8 month period of the year, with average returns over the past 30 years being positive in each of these months. 

2. Sentiment, according to sentimentrader data, suggests that pessimism in oil is at levels not seen since early 2002.

3. Commercial hedger positioning, though still net short 300k contracts, is off the extreme level of short 500k contracts that we saw in July of ’14.

Now that we know sentiment and seasonality are providing strong tailwinds for price, lets take a look at the weekly chart.

CL Weekly

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